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1. Suppose the CFO of a German corporation with surplus cash flow has 1 million Euros to invest. Suppose that interest rates on 1-year CD deposits in U.S. banks are 2%, while rates on 1 year CD deposits denominated in Euros in German banks are currently 4.5%. Suppose further that the CFO expects that the (euro/$) exchange rate will increase from 1 euro per $ to 1.1 Euros per $ during the coming year. Should the CFO invest in CD\'s denominated in dollars or in Euros? Show your work to substantiate your response as credible.

2. Explain why the Fed must normally add reserves to the banking system via open market operations, on most days, in order to maintain its interest rate target in the federal funds market.

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9167651

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